Chileone Co is a KABWE-based company which has the following expected transactions...

One month: Expected receipt of $240,000

One month: Expected payment of $140,000

Three months: Expected receipts of $300,000

As the Corporate Finance Manager for Chileoe CO. you collect the following information:

Spot rate ($ per K): 1.7820 0.0002

One month forward rate ($ per K): 1.7829 0.0003

Three months forward rate ($ per K): 1.7846 0.0004

Money market rates for Chileone Co:

Borrowing Deposit

One year Kwacha interest rate: 4.9% 4.6

One year dollar interest rate: 5.4% 5.1

Assume that it is now 1 April.

Required:

(a) Discuss the differences between transaction risk, translation risk and economic risk.

(b) Explain how inflation rates can be used to forecast exchange rates.

(c) Calculate the expected Kwacha receipts in one month and in three months using the forward market.

(d) Calculate the expected Kwacha receipts in three months using a money-market hedge and recommend whether a forward market hedge or a money market hedge should be used.

(e) Discuss how Kwacha currency futures contracts could be used to hedge the three-month dollar receipt.